Financial sector plays a vital role in
any economy particularly emerging economies like India which
needs to harness
its full potential. Indian financial sector is in early stage of evolving on an
inclusive financial system keeping in view of the aspirations of the billion
plus people in the country. Banking sector is an indispensable organ of the
financial sector for servicing various intermediations. The efficient
intermediation of financial system among people enables to achieve higher
economic and social development.
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Over the years in the process, Indian
financial system has also become more integrated with the global economy as
well as global financial systems. Keeping this in view, India’s growing
integration of financial services in terms of vertical as well as horizontal
linkages both in domestic and globally need to be backed up with effective
regulatory mechanism which keeps track and addresses the vulnerabilities of
external and internal in nature. One of the major modes of financial transactions
is banking as financial intermediaries that collect deposits from savers and
lend them to investors and others. The deposits of banks form the basis of
their lending operations. Banks
also use the deposits for advancing credit or for making investment in
government and other securities.
The prospect’s of growth of an economy
depends on the foundation of the financial sector’s soundness and resilience.
One of the core indicators of the financial soundness is the status and
magnitude of the non-performing assets (NPAs) in the banking system. The NPA is
also an important indicator for assessment of an economy’s financial prudence
and creditability for future investments.
According to the latest Economic Survey
2013-2014:
· Overall
NPAs of the banking sector increased to 3.90% of total credit advanced in March
2014 (provisional) from 2.36% of total credit advanced in March 2011. While
there has been an across-the-board increase in NPAs, the increase has been
particularly sharp for the infrastructure sector, with NPAs as a percentage of
credit advanced increased to 8.22% as in March 2014 (provisional) from 3.23% in
March 2011. Because of the slowdown and high levels of leverage, some industry
and infrastructure sectors, namely textiles, chemicals, iron and steel, food
processing, construction, and telecommunication are experiencing a rise in
NPAs.
· Further,
during 2012-13, the deteriorating asset quality of the banking sector emerged
as a major concern, with gross NPAs of banks registering a sharp increase. The
gross NPAs to gross advances ratio shot up to 3.6% in 2012-13 from 3.1% during
the corresponding period of the previous year. The deterioration in asset
quality was most perceptible for the State Bank of India (SBI) Group with its
NPA ratio reaching a high of 5% at end March 2013. With their gross
non-performing assets (GNPA) ratio reaching about 3.6% by end March 2013, the
nationalized banks were positioned next to the SBI group.
· The Gross
NPAs (GNPAs) of public-sector banks (PSBs) have shown a rising trend,
increasing by almost four times from March 2010 (Rs.59,972 crore) to March 2014
(Rs.2,04,249 crore) (provisional). As a percentage of credit advanced, NPAs
were at 4.4% in March 2014 (provisional) compared to 2.09% in 2008-09.
However, it is striking to note that the
former Deputy Governor of RBI, Shri K.C.Chakrabarty, who had pointed out
that “Economic slowdown and global meltdown are not the primary reason for
creation of stressed assets but the state of credit and recovery administration
in the system involving banks, borrowers, policy makers, regulators and legal
system have contributed significantly to the present state of affairs”.
The rising of NPAs across different
segments of banking system is not at all welcome trends and thus requires
adequate continuous assessment and monitoring system has to be put in place to
keep the financial system vibrantly free from adverse risks. Therefore, the
need of the hour is to reform the existing regulatory machinery including Corporate
Debt Restructuring (CDR) mechanism, Debt Recovery Tribunals (DRTs) & other
legal provisions, Asset Reconstruction Companies (ARCs) and Credit Information
Companies (CICs).
B.Chandrasekaran
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